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Sometimes Pure Junk Trades Very Strongly

Almost 3 years ago the small company 1347 Property Insurance (PIH) sold a small issue of preferred stock. The issue carries a 8% coupon and of course is not rated. It is one of the few insurance company issues that is cumulative.

Here is what I wrote in February 2018.

Below you can see the chart of the pricing since about 1.5 – 2 years ago. Honestly for the junk that it is trading has been strong.

Now I will just tell you now that the company is headed for the “trash heap” and holders of the preferred don’t seem to know that while they will receive a few more dividends it is likely they will see very little of their investment in a few more quarters–up in smoke–oh well I hope none of you are holding this issue. If the shares were trading at $5/share maybe it would be a good speculative–but that might be too high.

Now let’s turn to the reality of this issue–more specifically the company itself.

Here is the balance sheet for the quarter ending 9/30/2020. Note that the total assets have fallen by darned near 50% year over year. The cash hoard has fallen by near 50%. Sorry the data is small and hard to read. The SEC document is here.

Now let’s look at the income statement.

As you can see they have a loss of $20 million on the 9 months and a loss of almost $10 million during the most recent quarter.

Back in 2019 they sold a good deal of the business for cash and securities in buying company (FedNat). The buyer writes high risk homeowners policies in Florida and other gulf states–this is wonderful when there are no storms–but with all the storms the company has been hammered hard.

Now I am not going to go further with this–it isn’t worth it. I learned my lesson with the small insurer Atlas Financial where I took a 75% loss of some of their 6.625% baby bonds.

Let’s Watch The Gabelli Multimedia Trust

While updating the asset coverage ratios on the CEF preferreds tonight a glaring issue jumped out at me relative to the Gabelli Multimedia Trust (GGT). This CEF has 2 preferred issues outstanding.

On 6/30/2020 the trust had an asset coverage ratio of 200%–this is down from 297% on 12/31/2019. WOW–close call. The fund is required to have a 200% (or more) coverage ratio on the last day of each quarter–if not, they have a 60 day cure period after which they are required to redeem some level of their preferred shares to cure the asset coverage default. Of course we know that if they don’t cure the coverage default they are not allowed to pay dividends to common holders or make common share buybacks–not a position you want to be in when you have a declared level dividend policy of 10%.

But did you know that the fund can force redemption, at $25/share plus accrued dividends, BEFORE the 1st optional redemption date to cure a coverage default? Well they can.

Now in this instance this is bothersome-neither issue of the GGT preferreds have reached the optional redemption period yet. The GGT-E 5.125% issue is trading at $26.04 and the GGT-G 5.125% issue is trading at $26.40–they have traded at this level for a few months–I’m not sure they would have traded here if folks knew they had a potential redemption hanging over their head. Their respective optional redemption dates don’t arrive until 2022 and 2024.

You might say ‘why don’t they buy some shares on the open market?’ This would reduced the size of their portfolio while raising the asset coverage ratio–this may be possible, but up until now their policy is to buy on the open market only under $25/share and earlier in the year they did do a little buying of preferreds down in the $22-$23 area–but it was a minimal number of shares.

Data on the asset coverage ratio can be found here.

The good news is that on 6/30/2020 the net asset value was $6.14 and right now it is $7.15—so trouble was averted–for now. If Mario Gabelli was smart he would start looking to sell common shares soon–get while the getting is good Mario.

Here is my concern for this issue. Markets tumble and don’t spring back OR markets remain level and the 10% dividend eats into assets reducing coverage (over time).

Let’s see what happens here–minimally an educational study.

My source for the forced redemption comes from the original prospectus which can be found on the individual security pages linked above.

Stocks Way Up–Interest Rates Way Down

Under normal circumstances I would say “what the hell” in reaction to the current movements in equity and interest rate markets, but with the elections I simply say just another day to ignore and to wait longer before taking any actions whatsoever.

As most all of you know when stocks go sharply higher–for 3 days in a row now–interest rates would generally move higher as well–but this week the 10 year treasury started the week at around .86%–rose to almost .90% yesterday and today plunged to .77%. All I can say is that there are plenty of shenanigans going on with traders and I don’t want to participate in anything for a few days.

For all I know equities will plunge tomorrow and interest rates could spike–it’s a crazy time we live in for sure.

I am not inviting political discussions here–just conveying there is no reason to be involved (beyond current holdings) in these markets for a while.

The Hour is Here–Where Do We Go From Here? Comments Closed

I’ve closed the comments–keep us all from going off the rails.

We’ve waited all year for elections and even though a good shares of all of us have already voted tomorrow is ‘election day’.

I was really surprised to see equities head so sharply today–really thought we would see a treading water type of market–the push and pull of the bulls and the bears, but yet the markets remained solidly higher all day long–what does that mean?

Honestly the only thing that should have made investors overly exuberant today is that no matter who wins the elections we are going to see a big, fat, juicy stimulus package soon–the helicopters will be flying daily for months spreading all the greenbacks to everyone that needs them–and most certainly also to those that don’t need them.

For now I am just watching–which is what I do most of the time. Are we going to see a big market swoon? Or are we going to see a real blow off top?

Buckle up just in case–we now switch from political commercials on TV to non-stop nonsensical talk from the various talking heads.

Sortable Spreadsheet

Those that are interested in my sortable spreadsheet should always check here for the latest versions with updates.

This is updated constantly—as it has to be. I remove redeemed issues, add new issues etc probably every 48 hours. At this moment I have all but a couple issues that I follow in the spreadsheet.

Lately I have been chasing my tail around as the various quote sources are not very reliable. Some quotes work one day and then not the next. At this moment quotes seem to be working fine.

I put the date of update in the link description so one knows if they have the latest copy.